South Carolina              
Administrative Law Court
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SC Administrative Law Court Decisions

CAPTION:
Noel Glasgow vs. SCDOR

AGENCY:
South Carolina Department of Revenue

PARTIES:
Petitioners:
Noel Glasgow

Respondents:
South Carolina Department of Revenue
 
DOCKET NUMBER:
08-ALJ-17-0114-CC

APPEARANCES:
Petitioner, Pro Se

Carol I. McMahan, Esquire, for the Respondent
 

ORDERS:

FINAL ORDER

STATEMENT OF THE CASE

This matter is before the Administrative Law Court (Court of ALC) pursuant to Petitioner Noel Glasgow’s (Petitioner or Taxpayer) request for a contested case hearing pursuant to S.C. Code Ann. §12-60-450 (Supp. 2007). The issue presented to the Court is whether the Respondent South Carolina Department of Revenue’s (Department) determination for the tax year 2006 should be sustained. After timely notice to the parties, this matter was heard on June 12, 2008 at the offices of the Administrative Law Court in Columbia, South Carolina.

FINDINGS OF FACT

Having carefully considered the testimony and the arguments of both sides taking into account the credibility of the evidence and witnesses, I find by a preponderance of the evidence:

1. Petitioner is a South Carolina resident residing at 787 Mulberry Drive, Orangeburg, South Carolina.

2. In February 2007, Petitioner filed a timely 2006 South Carolina income tax return electronically.

3. Petitioner’s original 2006 return reported a $100,000.00 South Carolina Educational Lottery jackpot as income. Petitioner did not report any other South Carolina lottery winnings as income.

4. On February 9, 2007, Respondent sent taxpayer a letter requesting documents substantiating various itemized deductions on his Schedule A, including $71,391.00 in wagering losses from the lottery.

5. In response to the letter requesting documentation, Petitioner met with the Department at its headquarters and presented two suitcases full of South Carolina Educational Lottery Tickets. Petitioner later submitted purported affidavits from retailers who had sold him the losing lottery tickets. Petitioner drafted the affidavits, filling in the dates and ticket amounts, and presented it to the individuals to be endorsed. The Department deemed the statements unreliable after unsuccessfully trying to locate the individuals who signed the affidavits.

6. On February 20, 2007, the Department adjusted the Petitioner’s return and issued a proposed assessment disallowing the following deductions claimed on Schedule A: gifts, taxes, and wagering losses.

7. On February 23, 2007, taxpayer filed an amended return for the tax year 2006 claiming the following: (1) an exclusion from taxable income of $23,717.00 and (2) wagering losses.

8. By letter dated June 21, 2007, Petitioner advised Department of an additional $17,500.00 of wagering winnings received from the Lottery.

9. On February 20, 2007, the Department issued taxpayer a proposed assessment which disallowed the following deductions as “unsubstantiated:” (1) Charitable gifts in the amount of $2,100.00; (2) Personal property taxes in the amount of $499.00; and (3) Wagering losses in the amount of $71,391.00.

10. The notice of assessment issued by the Department included an adjustment of $28,504.00 as an addback to the petitioner’s income from the Health Care Employees Pension Fund. On March 6, 2006, however, the Department issued a revised notice of assessment which allowed Petitioner $3,000.00 as Petitioner’s allowable retirement income deduction.

11. The Department issued a Department Determination to Petitioner on February 22, 2008. Petitioner timely protested the proposed assessment and requested a contested case hearing on March 19, 2008. Petitioner contends that he has substantiated the aforementioned deductions and should be allowed to claim each of them.

CONCLUSIONS OF LAW

1.                  The Administrative Law Court has subject matter jurisdiction over this action pursuant to S.C. Code Ann. § 12-60-450 (Supp. 2007).

2. Deductions from gross income are not a matter of right, but are a matter of legislative grace. A taxpayer claiming a deduction must bring himself squarely within the terms of the statute expressly authorizing it. Southern Weaving Co. v. Query, 206 S.C. 307, 34 S.E.2d 51 (1945); Fennell v. South Carolina Tax Comm., 233 S.C. 43, 103 S.E.2d 424 (1958); Adams v. Burts, 245 S.C. 399, 140 S.E.2d 586 (1956). Further, in M. Lowenstein & Sons v. S.C. Tax Commission,[1] the South Carolina Supreme Court held that deduction statutes “are not to be liberally construed.”

3. The burden is always on the taxpayer to prove that he is entitled to the deductions claimed on his return. Welch v. Helvering, 290 U.S. 111 (1933).

4. All of the deductions at issue are deductions provided for by the Internal Revenue Code (“IRC”). South Carolina adopted the applicable IRC provisions for the year at issue, 2006.[2] Thus, the IRC and supporting authority, as well as South Carolina law, are controlling in any determination as to the propriety of taxpayer’s deductions. Petitioner has not provided adqequate documentation to support all deductions taken on Schedule A of his SC 1040. Petitioner has also failed to meet the record keeping requirements for deductions for cash and non-cash contributions required under the IRC.[3]

5. IRC § 170(f)(8)(A) provides that an individual taxpayer may deduct a contribution of $250 or more only if he substantiates the deduction with a contemporaneous written acknowledgment by the donee that meets the requirements of that section. Addis v. Commissioner, 118 T.C. 528, 533-534 (2002); Berry v. Commissioner, T. C. Memo. 2003-331; Stussy v. Commissioner, T. C. Memo. 2003-232; see also Weyts v. Commissioner, T. C. Memo. 2003-68 (discussion of legislative history underlying the enactment of § 170(f)). The written acknowledgement must describe the property contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the donee organization. IRC § 170(f)(8)(B); Treas. Reg. 1.170A-13(f)(2).

6. Petitioner has not complied with the requirements to substantiate the contribution deduction. At trial, Petitioner submitted a handwritten list of items which he stated that he had donated to charity. However, the alleged (and unnamed) donee organization can neither confirm that taxpayer actually contributed items, nor give a good faith estimate of the value of the items allegedly donated. Without such a written acknowledgment, the contributions cannot be substantiated and the statute precludes taxpayer from deducting the disputed amounts as charitable contributions.

7. IRC § 61 defines “gross income” as all income from whatever source derived. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Lottery proceeds are clearly within the purview of this general definition. Thomas v. Commissioner, 64 T.C.M. 955 (1992). Anastasio v. Commissioner, 67 T.C. 814 (1977), affd. without published opinion, 573 F.2d 1287 (2nd Cir. 1977). The lottery winnings of $100,000 and $17,500 received by taxpayer in 2006 are thus “gross income” and are taxable by the State.

8. IRC § 165(d) (2006) permits a deduction for “[l]osses from wagering transactions” but “only to the extent of the gains from such transactions.” Lottery gains and losses are considered “wagering transactions” under IRC § 165(d), and are thus subject to the limitations set forth therein. Tech. Adv. Mem. 9808002 (Oct. 24, 1997). Further, under § 12-6-560, “[a] resident individual's South Carolina gross income, adjusted gross income, and taxable income is computed as determined under the Internal Revenue Code. . . .” Thus, in order for taxpayer to deduct his claimed wagering losses for tax purposes, he must maintain sufficient records to substantiate his claim for a deduction as provided by IRC § 165.

9. While there are no specific statutory requirements for substantiating wagering losses, IRS Revenue Procedures and several federal cases provide recordation the IRS and courts have accepted and/or rejected in specific situations.

Revenue Procedure #77-29, 1977-2 CB 538. “Provide[s] guidelines to taxpayers concerning the treatment of wagering gains and losses . . . .” The Revenue Procedure suggests that taxpayers should maintain an “accurate diary or similar record” that contains the “date and time of specific wager or wagering activity; name of gambling establishment; address or location of gambling establishment; name(s) or other person(s) (if any) present with taxpayer at gambling establishment; and amount(s) won or lost.” Id. For lottery tickets, the IRS recommends that the taxpayer provide “a record of ticket purchases, dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winning statement.” Id.

10. The Petitioner failed to present to the Court the requisite records to substantiate wagering losses of $71,391. Petitioner presented thousands of lottery tickets in order to substantiate his $71,391 deduction claim, but failed to present a contemporaneous log of purchases or provide an accounting of his losses or gaming winnings. The Department has been unable to confirm that the tickets presented are losing tickets, or even that the tickets were purchased by the Petitioner. Given the IRS’s strict standards for using letters as a method for substantiation, unverified affidavits from store clerks will not be allowed to substantiate the deduction claim. The “Affidavits” are not in proper form. On each affidavit, Petitioner Noel Glasgow signed as “Deponent,” and the individuals from whom he obtained these statements are referred to as “witnesses.” Moreover, the statements were not properly moved nor admitted into evidence. ALC Rule 8(A) provides that “a party proceeding without legal representation shall remain fully responsible for compliance with these rules and the Administrative Procedures Act.” Thus, these statements, unsupported by any testimony from the individuals giving the statements, are inadmissible. Petitioner also presented the testimony of Mrs. Penny Fine, who corroborated the fact that he spent large sums of money on the lottery, both winning and losing. Mrs. Fine, however, could not produce any journals or logs that would rise to the level of substantiating the wagering losses.

11. Taxpayer’s income from Health Care Employees Pension Fund in the amount of $28,504 is includable in South Carolina taxable income. S.C. Code Ann. § 12-6-1140 (2000) provides:

§ 12-6-1140. Deductions from individual taxable income.

There is allowed as a deduction in computing South Carolina taxable income of an individual the following:

* * *

(4) amounts included in South Carolina gross income received for disability retirement due to permanent and total disability by a person who could qualify for the homestead exemption under Section 12-37-250 by reason of being classified as totally and permanently disabled;

(Emphasis added) In order to exclude disability retirement income, a taxpayer must show that he is receiving such income because he is “permanently and totally disabled.” Petitioner has failed to produce any information which would substantiate a finding that he is permanently and totally disabled. Petitioner was gainfully employed during the year 2006 by Richland Community and received wages of approximately $17,536 for his services rendered. Petitioner did not substantiate “permanent and total disability” such that the retirement pension should be excludable under South Carolina law. By way of example see, Anonymous Taxpayers v. S.C. Dep’t of Revenue, Docket No. 00-ALJ-17-0203-CC (August 25, 2000) (“Petitioner's disability did not render him totally and permanently disabled. Petitioner became employed approximately eleven months after he was terminated from Corporation, and he is still employed”).[4]

ORDER

IT IS HEREBY ORDERED that the findings contained within the Department’s determination be upheld.

AND IT IS SO ORDERED.

___________________________________

Carolyn C. Matthews

Administrative Law Judge

July 31, 2008



[1]277 S.C. 561, 290 S.E.2d 812 (1982).

[2]S.C. Code Ann. § 12-6-560 (2000) (“A resident individual’s South Carolina gross income, adjusted gross income, and taxable income is computed as determined under the Internal Revenue Code . . . .”).

[3]See also, S.C. Code Ann. § 12-54-210 (Supp. 2007).

[4]The Department’s assessment did, however, include a pension deduction of $3,000 as required by § 12-6-1140(3) and S.C. Code Ann. § 12-6-1170(A)(1) (Supp. 2007).


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